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Rating Agencies Downgrade PNB Following Rs 13,000-Crore Loss

Moody’s Investors Service and India Ratings have both downgraded Punjab National Bank after the lender reported a Rs 13,417-crore loss in the January-March quarter, which pulled down its capital ratios to below the regulatory minimum.

In a note released on Monday, Moody’s cut PNB to junk grade by reducing its rating to Ba1 from Baaa3. Moody's also downgraded PNB's foreign currency issuer rating to Ba1 from Baa3.

“The downgrade reflects the negative impact of the discovery of a number of fraudulent transactions on the bank's standalone profile, particularly its capital position,” said Moody’s in its note. It added that weak internal controls and processes of the bank have also been taken into account in the ratings review.

On Friday, India Ratings said that PNB’s long term issuer rating has been cut to AA+ from AAA earlier. The outlook on that rating is negative, India Ratings said.

The downgrade in the long-term issuer rating reflects the impairment in PNB’s ability to sustain its current position of systemic importance, with the possibility of a dip in its overall share of systemic assets and liabilities, mirroring the sharp deterioration in its asset quality.

India Ratings Release

Last week, PNB reported the biggest-ever quarterly loss in Indian banking history, partly a fallout of a Rs 14,000-crore fraud involving jewellers Nirav Modi, Mehul Choksi and their firms discovered by the bank earlier this year. The Reserve Bank of India’s new stressed asset framework also added to the bank’s pain and led to a net loss of Rs 13,417 crore in the fourth quarter of FY18.

The large loss led to a depletion in the bank’s capital. This, according to India Ratings, could lead to operational restrictions from the Reserve Bank of India. The RBI has been selectively placing banks under its ‘Prompt Corrective Action’ framework if their capital ratios and bad loan ratios breach certain pre-determined levels.

The ‘Negative’ outlook reflects a possibility of the Reserve Bank of India (RBI) invoking a regulatory action on PNB, constraining its operations, which could further weigh on its share of systemic assets and liabilities. India Ratings believes PNB could continue to struggle with its core capitalisation level, both on an immediate and sustained basis, in the absence of a significant capital infusion from the Government of India.

India Ratings

Moody’s estimates that the bank will need between Rs 12,000-13,000 crore in capital infusion to strengthen its capital ratios. The rating agency, added, that given the systemic importance of the lender, the government may step in.

“As the second largest public sector bank in India by total deposits, the systemic importance of PNB is very high and Moody's expects that the government will provide extraordinary support to the bank's creditors and depositors when required,” it said.